Oct. 5 (Bloomberg) -- Spain’s government bonds surged,
pushing 10-year yields down the most in four weeks, before Prime
Minister Mariano Rajoy meets his French and Italian counterparts
amid speculation the nation will need to seek a bailout.

Spanish 10-year securities extended a weekly gain after
European Central Bank officials yesterday reiterated they are
ready to start buying the bonds of troubled countries as soon as
the necessary conditions are fulfilled. Portuguese 10-year bonds
rose for a fifth day, the longest streak of gains in six weeks,
after the nation completed a debt swap two days ago. German
bunds declined as investors sought higher-yielding assets.

“The biggest driver for Spanish bonds right now is will
they or won’t they ask for aid,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank
in London. “If we see Spain asking for help, then we will see a
more dramatic move upward in the bonds because the uncertainty
would be removed.”

Spain’s 10-year yield dropped 21 basis points, or 0.21
percentage point, to 5.69 percent at 4:28 p.m. London time,
after falling 22 basis points, the most since Sept. 7. The 5.85
percent bond due in January 2022 rose 1.51, or 15.1 euros per
1,000-euro ($1,305) face amount, to 101.105. The yield has
declined 25 basis points this week.

Rescue Request

While ECB President Mario Draghi said yesterday the central
bank is ready to start buying bonds of sovereigns that ask for
aid, Rajoy on Oct. 2 denied reports a rescue request would come
this week. Economy Minister Luis de Guindos said yesterday no
bailout was needed.

The Frankfurt-based ECB will probably buy “large volumes”
of sovereign bonds for one-to-two months after the start of the
bond-buying program, then suspend purchases for an assessment
period, Reuters reported today, citing unnamed senior central
bank officials. The ECB declined to comment on the report,
according to Reuters.

Rajoy will hold discussions with Italian Prime Minister
Mario Monti and French President Francois Hollande in a
trilateral meeting at 6 p.m. in Valletta, Malta.

Portuguese Bonds

Portugal’s 10-year yield declined 41 basis points to 8.26
percent, extending its weekly drop to 74 basis points, the most
since the five-day period ended Sept. 7. The two-year yield
slipped below 4 percent for the first time since Jan. 24, 2011.
The rate fell as much as 52 basis points to 3.91 percent.

The nation’s debt agency, IGCP, exchanged securities
maturing next year for notes due in 2015, reducing its 2013
repayment burden as it tries to regain access to long-term
capital markets.

IGCP Chairman Joao Moreira Rato said in an interview
published yesterday that the country is looking for an
opportunity to sell securities directly to investors, known as
private placements, after the debt swap.

Investors should buy long-dated Portuguese bonds as the
debt exchange and the road to regain market access reduced
concern about “subordination” risk, or the risk that public-sector creditors would rank ahead of private investors in the
event of default, Paolo Batori and Robert Tancsa, London-based
strategists at Morgan Stanley, wrote in a research note today.

Volatility on Portuguese bonds was the fourth highest in
euro-region markets today after Ireland, Germany and Finland,
according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.

German bonds have returned 3.2 percent this year through
yesterday, according to indexes compiled by Bloomberg and the
European Federation of Financial Analysts Societies. Spain’s
securities gained 0.9 percent, Italy’s rose 15 percent, while
Portuguese securities earned 46 percent.